Question

Discuss five different takeover defense mechanisms and their effectiveness in mergers and acquisitions.

Answer 1

Answer:-

We will discuss 2 Pre-offer takeover defense mechanisms and 3 Post-offer takeover defense mechanisms

Pre-offer takeover defense mechanisms

1) Poison put - This anti takeover defense mechanism makes emphasis on bondholders. In this case the puts gives the bondholders the option to demand for immediate repayment of the bonds in case if there is an attempt to hostile takeover. This is different from other takeover defenses and is used in M&A when the company has issued bonds in the investments

2) Golden parachutes - This is a compensation agreement that is made between the target company and senior management that offers the managers a lucrative amount of cash if they agree to leave the target company after the merger takes place. In real M&A deals the amount offered to managers is not big enough to stop the takeover deal but it provides cushion to target company's management of no losing their jobs post merger.

Post-offer takeover defense mechanisms    

1) Just say no defense - This is just saying no to the hostile takeover, however if the potential acquirer approaches the shareholders with a tender offer or proxy fight the target can give reasoning to the shareholders why the offer is not worth and not in the best interests of shareholders.

2) Crown jewel defense- In this mechanism the target company may sell the subsidiary or one of the major part or asset to the third party. The hostile acquirer who feels that this subsidiary or major asset as an essential part of the deal it may cancel the takeover attempt, however the strategy may be illegal on some grounds if there is a sale post the did is announced by the hostile acquirer.

3) White knight defense- In this mechanism a friendly third party comes to save the target company. The target party may look for a third party who will be a good strategic acquirer and can offer more price than the hostile acquirer. This can lead to a bidding war that can fetch a good price to the target company post the acquisition.